Marin Independent Journal
Voters face choice: $15 billion bond measure or 'Armageddon' cuts
By Michael Liedtke
Associated Press
Sunday, February 15, 2004 - SAN FRANCISCO - California is quickly running out of cash and is bracing for acute financial pain after three years of political procrastination and budget bungling.
Now voters must decide if it makes more sense to approve a $15 billion bailout bond that might extend the misery for a decade or more, or suffer it more quickly through temporary tax increases and deep spending cuts.
Gov. Arnold Schwarzenegger is trying to persuade voters the bitter medicine should be dispensed gradually - that paying back the bailout bond during the next nine to 14 years is the most humane way for California to rehabilitate itself.
His opponents say California will be making a terrible mistake if the state takes the unprecedented step of shouldering long-term debt to solve short-term problems.
In either case, it's clear that the time has finally come for California to balance its checkbook - the state will literally run out of money unless Schwarzenegger and the legislature find a way to produce $14 billion by June 16.
If voters refuse to authorize the bond under Proposition 57 on the March 2 ballot, Schwarzenegger says he'll have to make "Armageddon" spending cuts that will make California a less desirable place to live. The intense pressure on California to repay its debts also could create uncertainty on Wall Street.
Without the bailout bond, California's obligation to repay the $14 billion due in June would compete against its duty to provide essential public services, said Timothy Blake, managing director for Moody's Investor Service, one of three major credit rating agencies. "That is not an orderly situation."
But Schwarzenegger's critics say the bond measure would leave the state in a more perilous position, by limiting the money California can borrow in the future to pay for schools, roads and other quality-of-life improvements needed to maintain home values and the state's economy, the sixth largest in the world.
"It will be another sign to business that California is stepping back from investing for the future," Stephen Levy, director for the Center for Continuing Study of the California Economy, wrote in his analysis of the deficit bond and its impact.
California's dilemma stems from the state's failure to reduce spending as the recession drained tax revenue. The poor financial management fueled the recall of Democratic Gov. Gray Davis, put the Democratic-led legislature on the defensive and left the state with a deficit the Republican Schwarzenegger estimates at $22 billion.
Recent improvements in the stock market will help, but not in time to solve California's cash crisis. Even if the economy soars and stock option windfalls become prevalent again, the income taxes from the gains won't be due for many months.
The situation has tormented California before, most recently in the early 1990s under Republican Gov. Pete Wilson, who responded by arranging billions in short-term loans, reducing spending and raising taxes.
Schwarzenegger prefers to keep taxes at their current levels and borrow over the long-term, raising enough cash immediately to help pay $14 billion in short-term notes due June 16 and free up money for other purposes. The bond would be repaid by siphoning a quarter cent from the existing state sales tax.
"This is the only solution for the state to move out of its financial problems in a practical way," Controller Steve Westly said during a municipal finance conference earlier this month. Westly, a Democrat and California's chief financial officer, has joined forces with Schwarzenegger to rally support for Prop. 57.
The bond hasn't inspired much enthusiasm so far, with a mid-January poll showing just 35 percent of voters in favor of Prop. 57. The initiative's supporters are counting on a television advertising blitz showcasing Schwarz-enegger's marketing skills to change the tide.
Paying back just the principal on a $15 billion bond would cost about $425 per person, based on California's current population. That's before factoring in the interest, which will depend on the rate California gets.
Like a mortgage, the long-term bond will likely carry a lower interest rate than a short-term loan. California would pay less annually to service the debt, freeing up money for other bills. But longer repayments also mean higher total interest charges over the life of the loan. The bond also might prevent California from borrowing money for its future needs as its population continues to swell.
Securing a long-term loan to pay for a budget deficit is something California has never done. Schwarzenegger is assuring Californians it won't happen again by tying Proposition 57's fate to a companion initiative, Proposition 58, that would prohibit future borrowing to bridge budget deficits.
California Treasurer Phil Angelides, a Democrat plotting a possible run for governor in 2006, says the bailout bond will haunt the state for a long time, if it's passed.
"It's the wrong way to go. It's hooey," Angelides said during an interview. "It's not going to solve the deficit. It's just going to run up our credit card bill."
He estimates paying back the principal and interest on a $15 billion bond will cost $1,664 per California household. Instead, he said, the state should do whatever it takes to eliminate the deficit within three years. That would mean billions in spending cuts, but he says he thinks it won't be as painful as it sounds.
By raising the state sales tax by half cent and raising taxes on the wealthy, Angelides estimates California could generate an additional $11.9 billion in three years, and take out new short-term loans in the meantime.
Proposition 57 supporters say that's not realistic, largely because California's finances are in such pitiful shape that lenders will demand higher repayment terms for short-term loans.
When California borrowed $14 billion last year, its credit rating was slightly higher and lenders were offered a security blanket - a $10.7 billion Fiscal Recovery Bond authorized by the Legislature and Davis. Never approved by voters, the bond was blocked from being issued. While California is still fighting in court for approval, the money it can raise has dropped to $8.6 billion.
If Proposition 57 fails and the Fiscal Recovery Bond proves unlawful, California won't have much bargaining power with short-term lenders when its bills come due in June.
The problem is exacerbated by the state's BBB credit rating, just a couple notches above junk bond status. A strong stock market also is luring money away from the municipal bond market, forcing issuers to pay higher rates to attract investor interest.
A $15 billion long-term bond is something California should be able to easily handle without causing further damage to its credit rating, since that rating is already so poor, said Steve Zimmermann, the Western region managing director for Standard & Poor's, another major credit rating agency. |
